Trump Presidency: Implications For South East Asia

Donald Trump's presidency will affect South East Asian states to varying degrees, with Singapore and Vietnam amongst the most vulnerable to a more protectionist US trade policy and self-interested foreign policy. The overall impact of Trump's presidency on Thailand, the Philippines, and Malaysia is likely to be neutral, with political ties improving but economic relations weakening somewhat. Trump's tougher trade policy towards China also poses major risks for South East Asia, as Washington's more protectionist stance could undermine intra-regional trade.

Although South East Asia did not feature prominently in US President-elect Donald Trump's campaign promises, the region will be affected in a number of different ways by Trump's proposed changes to the US's foreign and economic policies. During the campaign, Trump consistently advocated a more protectionist trade policy, and he also signalled reduced willingness to defend US allies. He also stated that he would prioritise American national interests, as opposed to the interests of US allies or the so-called international community. Since his election, Trump has toned down his rhetoric somewhat, suggesting that less dramatic changes will be in the offing. However, we still anticipate noteworthy changes to the status quo in US relations with other countries, as Trump will be unlikely to retreat from all of his campaign promises.

As regards South East Asia, we expect that Singapore will be most affected by the Trump presidency, given its reliance on international trade and its close political ties with the US. While Vietnam will also feel the effects of a more self-interested US, we believe that the impact will be smaller than that of Singapore. Overall, the net impact on Thailand, the Philippines, and Malaysia will be largely neutral, with all three countries likely to experience warmer political ties, but see their economic ties with the US weaken slightly. Lastly, despite warm relations between Indonesia and the US throughout the Obama administration (2009-2017), the country is likely to be among the least affected by changes to US trade and foreign policies due to the domestic-focused nature of its economy. We note that the greatest impact on South East Asia is likely to stem from any changes to the US's China policy. Trump's strong rhetoric towards China suggests that he could take a harder line on Chinese exports to the US. Considering that China is one of the largest economic players in South East Asia, a decline in Chinese demand would have significant spill-over effects on all the major South East Asian economies.

The US An Important Source Of FDI

South East Asia - FDI From The US, % Of Total

Source: BMI, various national sources NB: FDI figures are for 2015 with the exception of Singapore (2014)

Singapore To Be The Most Affected

Given that Singapore is a small, open economy with extensive trade and investment links to the US, we believe that Trump's shift towards a more protectionist stance and change in US foreign policy towards a more unilateral one will be negative for Singapore. Trump's announcement that the US will withdraw from the Trans-Pacific Partnership (TPP) will likely undermine Singapore's geopolitical strategy as well as have a negative impact on the trade-driven city-state's economy.

The Greatest Game

Asia - Geopolitical Alignments And Flashpoints

Source: BMI

The stalling of the TPP and Trump's comments suggest a rise in trade protectionism, which poses a threat to Singapore's economic development model. In addition, any move that contributes to increasing friction in international trade leaves small, open economies like Singapore worse off. Singapore's size means that it depends on a favourable international environment to achieve growth, and thrives when bigger countries abide by international norms. However, Trump's pronouncements of a more self-interested US foreign policy could undermine the international economic framework, which the US has largely taken responsibility for upholding since World War II.

FDI An Important Part Of The Economy

Singapore - FDI (2014), % Of Total

Source: BMI, Singstat

We have previously noted that the failure of the TPP would also undermine Singapore's carefully calibrated balancing act between the US and China. The TPP is viewed in Singapore as a way of counterbalancing growing Chinese influence in the region and as a tangible sign of the US's commitment to Asia. Washington's failure to ratify the TPP would thus be a considerable blow to Singapore's efforts at encouraging greater American involvement in the region. It could also be viewed by Beijing as a sign of reduced US interest in the region, leading to greater Chinese assertiveness and contributing to greater uncertainty in an already volatile region. Given Singapore's unique relationship with China, being the only Chinese majority country in South East Asia, the city-state is likely to face an increasingly difficult diplomatic landscape as it seeks to keep the US engaged in Asia while managing Chinese expectations (see ' Failure To Ratify TPP Would Be Significant Blow For Asia', August 18).

Trade A Mainstay In The Region

South East Asia - Exports (2015), % Of GDP

Source: BMI, various national sources

Concerns over Trump's proposals to impose a 35% tax on products made by companies that move their production from the US to other countries could lead to a decline in investment in Singapore, with the US being the biggest sources of foreign direct investment (FDI), accounting for 15% of total FDI in 2014. This would also undermine Singapore's growth model, with FDI being a key component of economic growth and source of good quality jobs. Given the amount of uncertainty over Trump's actual policies, it is likely that US businesses could delay their FDI plans into Singapore until there is more clarity. In terms of Singapore's exports, we believe that the direct impact will be muted, with overall exports to the US only accounting for approximately 5.0% of total exports. As such, the impact on Singapore's economy is likely to stem from a decline in FDI, with spillover effects on the labour market.

Vietnam: Recalibrating Foreign Policy As Exports Face Headwinds

We expect Vietnam to be the second most affected country under the Trump presidency, with the country having shifted towards greater engagement with the US in the past few years as part of its efforts to counterbalance rising Chinese influence in the South China Sea. Furthermore, the proposed increase in import tariffs by Trump will have a considerable impact on the Vietnamese economy, with the US being one of the country's main trade partners (19.2% of exports in 2015).

The US Is The Largest Export Market

Vietnam - Exports (LHS) & Imports In 2015, % Of Total

Source: BMI, IMF

Following Trump's victory, the ruling Communist Party of Vietnam (CPV) was quick to reiterate its independent foreign policy, where it would seek to maintain good relations with all countries, including the US. While we believe that the assertion of its independent foreign policy will mitigate the effects of a more unilateral US foreign policy, Trump's apparent lack of interest in Asia has cast doubts over the US's commitment to upholding international law in the disputed South China Sea. Tensions between Vietnam and China continue to simmer following the ruling by the Permanent Court of Arbitration (PCA) on July 12, and we believe that there remains scope for sporadic clashes between both countries in the near future (see 'South China Sea Ruling To Exacerbate Regional Tensions', July 13). As such, any reduction in US involvement in Asia would suggest that Vietnam has lost a useful ally in the South China Sea, with the Vietnamese navy being considerably weaker than the Chinese one.

The failure of the TPP also casts a shadow on Vietnam's domestic economy and the government's fledging efforts to restructure the inefficient state-owned enterprises (SOEs). We had previously noted that the TPP would have provided an external force that would enable the government to accelerate efforts to improve on the bloated SOE sector (see 'Failure To Ratify TPP Would Be Significant Blow For Asia', August 18), and that this would be positive for the economy in the long run. However, the CPV voted to shelve the ratification of the TPP in mid-September following the announcement that US congress would not discuss the TPP during the current lame duck session of congress (ending January 3 2017).

We expect the biggest blow to the economy to come from a rise in trade protectionism, with the US being Vietnam's largest export destination. Given the export-oriented nature of the Vietnamese economy, a rise in US import taxes would have an adverse effect on Vietnam's main exports including textiles, footwear, aquatic products, and wood furniture. With a considerable amount of the CPV's legitimacy stemming from robust economic growth, a slowdown in Vietnam's economy could also prove potentially destabilising to the CPV's rule.

Thailand: Improvement In Bilateral Relations, While Economy Suffers

Thailand could see relations with the US improve as the Trump administration appears less concerned with democratisation than the Obama one. However, the rise in trade protectionism and possibility of increased taxes on overseas investments by American firms will have a negative impact on FDI in Thailand. While Thailand is a major non-NATO ally, bilateral relations have cooled considerably following the military coup in May 2014 amid the Obama administration's concerns over human rights and democracy. This has been reflected in the downsizing of the joint Cobra Gold military exercises over the past two years. However, we believe that bilateral relations could see a slight improvement, with the Trump administration less likely to criticise the junta.

US A Large Investor

Thailand - FDI (2015), % Of Total

Source: BMI, BoT

Furthermore, we believe that existing security ties are unlikely to be derailed under the Trump administration. For one, the US has a minimal presence in Thailand and the kingdom has not been named as one of the countries that Trump is seeking receive greater payment for the upkeep for US forces. Instead, security relations are likely to remain unchanged.

On the other hand, we expect the Thai economy to bear the brunt of the change in US economic policy, with the US being one of the largest investors in the country (accounting for 12.2% of total FDI in 2015). Furthermore, the Thai economy is largely dependent on FDI to fuel its export-oriented industries and a rise in trade protectionism could see a significant fall in exports to the US (one of Thailand's largest export destinations, accounting for 10.5% of total exports in 2015).

Philippines: In A Similar Situation As Thailand

In our view, the Philippines is in a similar position to Thailand, and Manila and Washington DC could see an improvement in diplomatic ties due to the Trump administration's apparent lack of concern over human rights. Ties between the two countries have been increasingly strained following the Obama administration's criticism of Philippine President Rodigro Duterte's war on crime and drugs, prompting the Philippines to improve ties with China instead (see ' Duterte's Pivot To China: What Is The Significance?', October 21). However, Duterte appears to have taken a more conciliatory stance towards Trump, which could see a thawing of currently cool ties.

Heavily Geared Towards The US

Philippines - Exports (LHS) & Imports In 2015, % Of Total

Source: BMI, PSA

However, we believe that the South China Sea will remain a geopolitical flashpoint and could cast a pall of uncertainty over Philippine-US ties. While Trump has advocated a more robust US foreign policy, the President-elect has also been extremely vocal about only advancing US foreign policy interests. As such, a decision by the US to pull back from its activities in the South China Sea could see an increase in Chinese activity in the contested areas. On the other hand, Trump might view Chinese activities in the South China Sea as an affront and decide to take a more confrontational stance in the region. If this were to happen, the Philippines could decide to recalibrate its current rapprochement with China as Manila would be assured of the US's commitment to defend its sovereignty in the South China Sea.

The biggest impact of the Trump presidency on the Philippines will be economic, with Trump's 'America First' policies likely to lead to a more challenging operating environment for the Philippines. For one, Trump's proposed immigration curbs could pose considerable risks to the Philippine economy that is reliant on remittances from overseas workers to boost economic growth (with remittances accounting for 10.3% of GDP, according to World Bank). The US is host to approximately 35% of all overseas Filipino workers, and it is estimated that they account for about 31% of total worker remittances into the Philippines. Furthermore, the Philippines' business process outsourcing could come under pressure following Trump's pledge to bring jobs back to the US. The industry caters mostly to US companies, employs approximately 1.2mn Filipinos and generates more than USD20bn in revenue annually (about 9% of GDP). The outsourcing industry could thus see a decline in American investment under a Trump presidency. This is likely to lead to a decline in FDI as well as exports (particularly services exports), with the US being one of the Philippines's largest export destinations (13.9% of exports in 2015).

Impact On Malaysia To Be Largely Neutral

We expect the effects of a Trump presidency on Malaysia's economy to be limited, and believe that bilateral relations are unlikely to undergo a significant change. Malaysia and the US have historically had a fairly stable relationship characterised by low-key bilateral engagement on both sides. We do not expect this to change significantly and believe that Malaysia will continue with its existing foreign policy of seeking cordial relations with both the US and China. Moreover, we note that the Trump administration's disinterest in human rights will be positive for Malaysia and relations could see a slight improvement following the US Department of Justice's (DoJ) probe into the alleged misuse of funds by Malaysian sovereign investment vehicle 1Malaysia Development Behard (1MDB). While relations with the US might have been slightly clouded by the DoJ probe under Hillary Clinton (representing a continuation from the Obama administration), the Republican Trump presents an opportunity for a renewal of bilateral ties (see '1MDB Fallout To Be Limited', July 28).

Slowdown In Singapore And China Will Weigh On Exports

Malaysia - Exports (LHS) & Imports In 2015, % Of Total

Source: BMI, Department of Statistics

In addition, Trump's tough rhetoric towards terrorism and the rise of radical Islam could be positive for Malaysia, which has positioned itself as a reliable ally in the fight against global terrorism. Touting itself as a beacon of moderate Islam, Malaysia has constantly sought to crack down on domestic terrorism and strengthen anti-terror efforts within South East Asia. However, its best efforts remain stymied by the lack of funding and expertise (see 'The Two Faces Of Terrorism In SEA', January 2 2015). As such, Malaysia could benefit from an inflow of funds and expertise should Trump's rhetoric against terrorism translate into greater efforts to fight terrorism.

We are of the view that the failure of the TPP under the Trump presidency will have the biggest impact on the Malaysian economy. We had previously noted that the TPP was viewed as a proxy US free trade agreement (FTA) and would have opened up the considerable US government procurement market to Malaysian exports. The Malaysian government had also sought to use the TPP as an external force to enact domestically unpalatable restructuring measures aimed at improving the competitiveness of the economy (see 'Failure To Ratify TPP Would Be Significant Blow For Asia', August 18).

Furthermore, the rise in trade protectionism will present headwinds to Malaysian exports with the country being heavily dependent on trade for growth. The US is one of Malaysia's largest export destinations after Singapore and China. Given that we expect Singapore's economy to be negatively affected by the Trump presidency, there is reason to expect the slowdown in one of its largest trade partners to have a negative impact on Malaysian exports as well.

Indonesia: Impact Of Trump Presidency To Be Minimal

Indonesia is likely to be the least affected by the Trump presidency given its stable ties with the US and relatively closed economy. Instead, we expect the fallout from trade to be indirect, as Indonesia's main trading partners see a possible decline in demand. On the political front, while Indonesia has little chance to improve bilateral relations with the US following the departure of Obama from the White House, we do not expect a significant deterioration in ties and believe that relations are likely to remain cordial, with Indonesia continuing with its existing foreign policy.

Impact On Trade To Be Indirect

Indonesia - Exports (LHS) & Imports In 2015, % Of Total

Source: BMI, ADB

Having the largest Muslim population in South East Asia, Indonesia is in a similar position to Malaysia and is likely to benefit from Trump's increased interest in curbing terrorism. As mentioned previously, Indonesia's many islands and porous borders have contributed to the rise of domestic terrorism and the lack of resources has hampered government efforts to clamp down on terror (see 'Islamic State's Expansion To Be Limited By Local Factors', January 19). As such, an increase in funds and foreign expertise would go a considerable way in improving Indonesia's counter-terror abilities.

SEA Has Greater Exposure To China

South East Asia - Exports To The US (LHS) & China In 2015 - % Of Total

Source: BMI, various national sources

Considering that Indonesia's economy is largely domestically-oriented, we do not expect the rise in trade protectionism to have as great an impact on the Indonesian economy compared to the rest of South East Asia. While the US is Indonesia's third-largest trade partner, the expected decline in trade due to rising US protectionism is unlikely to have a considerable impact on the economy. Furthermore, the US is not a significant source of FDI. Instead, we believe that any fallout from trade will be indirect and be a result of lower demand from Indonesia's main trade partners (most of which are trade-oriented and heavily involved with the US).

Trump's China Policy To Have Greatest Impact On South East Asia

While the policies likely to be carried out by a Trump presidency will impact South East Asia to varying degrees, South East Asia's biggest threat stems from Trump's rhetoric towards China. The President-elect has repeatedly stated that China is a currency manipulator and has suggested that he will levy trade measures against China. Given that China is the largest trade partner for many South East Asia nations, the fallout from a decline in Chinese demand will likely lead to a significant fall in exports from South East Asia. In particular, China imports many intermediate goods and raw materials from South East Asia as part of the regional manufacturing supply chains for its export-oriented sector. The imposition of trade measures against China will thus dampen its export-oriented sector considerably, having negative knock on effects on South East Asia.